The trend of the international oil market is unpredictable

Recently, the international crude oil market, which has been impacted by multiple factors, has encountered another change. On December 2, EU member states passed a resolution to set a price ceiling of US$60 per barrel for Russian seaborne oil. Subsequently, members of the Group of Seven (G7) and Australia said they had agreed to set a price cap for Russian seaborne oil. The decision came into effect on December 5 along with the EU's oil embargo on Russia. Subsequently, the relevant spokesman of the Russian government stated that it would rather reduce production than abide by the price ceiling set by the above-mentioned countries. On the other hand, on December 4, the Organization of the Petroleum Exporting Countries (OPEC) and other oil-producing countries (OPEC+) participating in production cuts decided at their monthly meeting to maintain the current production policy.

Due to another restriction on Russian oil exports, market participants had predicted that international oil prices would fluctuate sharply after OPEC maintained production cuts and Russia restricted exports. However, the market gave a completely different answer. On December 5, international oil prices continued to decline. As of December 8, the price of light crude oil futures on the New York Mercantile Exchange closed at US$71.46 per barrel, and the price of London Brent crude oil futures closed at US$76.15 per barrel, a decrease of US$9.09 per barrel and US$9.09 per barrel respectively compared with November 30. 9.28 US dollars / barrel, which is quite different from the market's previous forecast. However, market participants still said that future international oil prices will be volatile.

EU adopts price limit for Russian oil exports

On December 2, after a long period of deliberation, the European Union finally passed a price cap on Russian seaborne oil. The resolution passed by EU member states on the same day decided to set a price ceiling of US$60 per barrel for Russian seaborne oil, which will take effect on December 5. EU member states said they did not expect any revisions to price caps to be made retroactively, allowing complying deals concluded before the cap was changed. In addition, the EU stated: "The Price Cap Coalition may also consider further action to ensure the effectiveness of the price cap." Details of possible further actions were not disclosed.

According to a Reuters report, the EU followed the price ceiling proposed by the G7, aiming to reduce Russia's oil revenue and prevent global oil prices from soaring after the EU's crude oil embargo on Russia came into force. The G7 price cap would allow non-EU countries to continue importing Russian oil by sea, but the G7, EU and Australia would ban shipping, insurance and reinsurers from servicing Russian oil globally unless it was sold below the price cap. However, Poland has long resisted the ceiling level. The country has demanded that the cap be as low as possible to squeeze Russian revenue. However, Poland's ambassador to the EU, Sardos, said Poland now supported the EU's proposal after joining a mechanism that would keep Russian crude prices capped at least 5 percent below market prices.

European Commission President Ursula von der Leyen said: "The price ceiling will significantly reduce Russia's revenue. This will help us stabilize global energy prices and benefit emerging economies around the world." The ceiling will be "adjusted over time" in response to market development. Since the world's important shipping and insurance companies are all in G7 countries, the price cap will make it difficult for Russia to sell oil at a higher price.

In addition, on December 7, the European Commission also proposed the ninth round of sanctions against Russia, which will implement new export controls and restrictions on dual-use goods such as key chemicals and nerve agents produced in Russia.

Russia Threatens to Cut Oil Production

After the European Union adopted and took effect the price cap on Russian oil exports, Russian Deputy Prime Minister Novak stated that, as the world's second largest oil exporter, even if it had to cut production, Russia would not sell oil according to the price cap set by Western countries.

On December 4, Novak stated that the Western countries' move is a gross interference that violates free trade rules and will cause supply shortages and destabilize the global energy market. Novak said: "We are studying the mechanism of prohibiting the use of price cap instruments, regardless of the set level. Because such intervention may further destabilize the market. We will only sell oil and oil products to those who are willing to do so under market conditions. Countries that cooperate with us, even if we have to cut production slightly.” Novak said the price caps set by Western countries could cause turmoil in the oil product market and may affect other countries besides Russia.

Since the Russia-Ukraine conflict escalated in February this year, the transaction price of Russian crude oil price indicator - Ural blend oil has been "discounted" relative to international oil prices. According to Reuters data, on December 2, the day when the price limit order was issued, the price of Urals crude oil was about 61.3 US dollars per barrel. As of December 8, according to data from the Trading Economics website, the price of Urals crude was $52.71 a barrel.

However, Russian media said that the EU's "price limit order" on Russian oil is unlikely to be effective. Russia will refuse offshore oil exports to the EU, but this does not mean that Russia will completely stop oil exports to the EU, and it will continue to supply oil to Central and Eastern European countries, especially Hungary. In addition, oil transported by sea can be exported to other countries and then shipped to EU countries, which will increase the price of oil imports. In addition, Russia will seek to continue to increase exports to Asian countries. Ultimately, the behavior of market participants will make price ceilings less important than they are now expected to be.

OPEC takes a wait-and-see attitude

While the European Union passed a price limit on Russian oil, OPEC+ is also considering the issue of reducing crude oil production. On December 4, OPEC+ agreed to maintain existing oil production. Overall, oil-producing countries take a wait-and-see attitude and will continue to assess the impact of the West on Russian oil price limits and changes in market demand.

Previously, in order to ensure the high level of international oil prices, OPEC+ carried out several rounds of production restrictions. However, judging from the trend of international oil prices since September, the effect of sharp production cuts by oil-producing countries is not obvious, and international oil prices have fluctuated and declined. In its November oil market report, OPEC explained that widespread high inflation, tightening monetary policy by major central banks, high debt levels in many economies, tightening labor markets and continued supply chain constraints added to the uncertainty in the world economy, Geopolitical uncertainty and weak economic activity dampened market demand.

Around December 5, analysts said that the current international market is facing huge geopolitical risks, and there are negative and bullish factors intertwined. Major oil-producing countries hope to keep a low profile and are still waiting to see and assess changes in market demand. Market participants believe that the OPEC+ meeting comes at a time when the EU and the G7 decide to impose caps on Russian oil exports. The market is concerned that Russia may cut production sharply and cause market supply cuts, boosting the bullish sentiment on oil prices.

However, contrary to the expectations of market participants around December 5, international oil prices have fallen sharply in the past week. Market participants said that as the U.S. economy is still strong, the market's optimistic expectations for the Fed to slow down interest rate hikes have been frustrated, which is the main reason for the current decline in international oil prices. According to data released by the Institute of Supply Management in the United States on the same day, the service industry sentiment index in the United States in November was significantly higher than market expectations. Market concerns about the Fed's continued tightening of monetary policy have intensified, leading to lower prices for risky assets, including crude oil futures.

However, some market participants insisted that oil prices will be volatile. Craig Elram, a market analyst at U.S. foreign exchange trader ACE, predicts that the risk of sharp fluctuations in crude oil prices has increased in the near future. Amrita Sen, research director of the British Energy Sight Consulting Company, believes that there are huge unknowns in the current international crude oil market, so it is prudent for major oil-producing countries to maintain policy stability rather than increase market volatility. Major oil producers are expected to take action to increase or decrease supply if needed.